Advantages and disadvantages of sale of assets

Written by chris joseph

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A home is often the most valuable asset owned by an individual. (Medioimages/Photodisc/Photodisc/Getty Images)

An asset can be categorised as any item owned by an individual or business that can be assigned monetary value. An asset can increase or decrease in value over time. Assets commonly include items such as homes, vehicles, land and businesses. The sale of assets can result in a number of potential advantages and disadvantages.

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Making a profit

Some types of assets, such as homes, jewellery or collectibles, may appreciate in value over time. For the owner, this can mean he'll enjoy a return on his purchase if the asset is worth more than the total amount of his investment at the time of the sale. Investors who sell an asset such as a share portfolio can use the profits to finance other investment ventures. Successful entrepreneurs can also sell their business and use the profits to fund their retirement.

Reducing debt

Another advantage of selling assets is that the proceeds can be used to reduce or eliminate debt. People who have an unused vehicle can sell it to reduce their credit card debt or apply it to their home mortgage. Business owners can sell outdated equipment or an unused building to reduce the amount they owe to creditors. In extreme cases, selling assets can help ward off potentially devastating events such as bankruptcy.

Tax consequences

A disadvantage of selling an asset is that there could be tax consequences. In general, when you purchase an asset and later sell it at a profit, it is subject to Capital Gains Tax. Factors such as income level and the type of asset can result in a higher or lower tax rate. Homeowners who have lived in the home for a specified number of years before selling at a profit may also be exempt from CGT.

Reduced value

In some cases, selling an asset can result in not receiving the full market value for the item. A homeowner who needs to sell a property quickly, perhaps due to financial problems or the need to relocate, may not have time to wait for and weigh a variety of offers. A failing retailer may be forced to close her doors and sell her merchandise and other business assets at a liquidation sale, which typically means dramatically slashing her prices.